Category: Print Edition

The Boka Growers Forum helps tobacco farmers improve crop quality and sustainability.

By Timothy S. Donahue

Nothing seems easy for the tobacco farmer in Zimbabwe. Over the past decade, domestic production of the “green gold” has been a roller coaster ride. After plunging to 48.3 million kg in 2008, volumes have recovered, but the industry continues to face plenty of challenges. Shifting demand patterns, continued economic uncertainty and, lately, an El Nino-induced drought keep many farmers awake at night. And volumes are only half of the story—the key to competing in the global tobacco market is product quality.

To help Zimbabwean tobacco farmers increase crop quality, the Boka Tobacco Floors in 2011 launched the Boka Tobacco Growers Forum (BGF). “It is a unique platform dedicated to promoting and teaching good agricultural practices, sustainability, diversification and protection of the environment to tobacco growing communities,” says Chido Nyakudya, marketing and business development director for Boka Tobacco Floors. “The forum facilitates better understanding of trading requirements to tobacco growers that market their crop at our facility.”

The BGF is the largest tobacco forum in the country. Its key objective, according to Nyakudya, is to enable growers to achieve excellence through sustainable production of quality tobacco. The BGF is held twice a month at a carefully selected tobacco growing region. Farmers from surrounding areas come together to learn about proper growing techniques and sustainability. “The information the farmers acquire at our forum is useful for them throughout their tobacco cycle, from field to floor,” says Nyakudya.

Last year, during a forum held in Karoi in the Mashonaland West province, an estimated 1,000 growers gathered on a local farm to discuss tobacco. Beyond simply helping the farmers with ideas, the BGF is also building relationships between the farmer and other stakeholders. “The forum provides a platform for interaction among tobacco farmers and service providers, such as insurance companies, buyers, research institutions as well as government departments,” says Boka Tobacco Floors CEO Rudo Boka. “The program has helped to equip farmers with knowledge on what is required of them when they come to market themselves at the floors, as well as knowledge on increasing tobacco quality and yield with a strong focus on sustainability.”

In 2012, the year after the BGF began, Zimbabwean farmers produced 166.7 million kg and earned about $612 million. Overall, according to the Tobacco Industry and Marketing Board (TIMB), the tobacco industry pumped more than $1.2 billion into Zimbabwe’s economy that year. The quality of the tobacco has also risen significantly. Tobacco sold for an average of about $3.67 per kg in 2012, the highest since at least 1990, compared with $3.65 for Brazilian tobacco, one of the Zimbabwe’s biggest competitors, according to the Zimbabwe Tobacco Association.

The trend continues. Tobacco exports in 2015 earned Zimbabwe $867 million compared with $772.5 million in 2014, according to the TIMB. Tobacco exports in 2015 increased by 12 percent to 151.9 million kg compared to 135.5 million kg in 2014. In 2013, the country earned more than $1 billion from tobacco exports. The 2015 numbers may be slightly skewed due to poor rainfall that season. More importantly, says Boka, Zimbabwe has continued to find success in tobacco even as the number of farmers continues to decline.

According to the TIMB, the number of registered tobacco growers for the 2015–2016 cropping season has dropped by 20 percent from 70,161 in the 2014–2015 farming season.  There were only 8,959 new growers for the 2015–2016 farming season, according to the TIMB, nearly half of the previous cropping season’s 16,400. In the 2013–2014 cropping season, at least 62 percent of those who grew tobacco were small- to medium-scale communal farmers. The decline in tobacco growers has been attributed to a decline in average selling price at the auction floors.

Boka says this isn’t as big of a problem as it may seem, because while farmers may be producing less, the quality has improved. “As we reach more farmers through events such as the forum, quality will continue to improve and market prices will increase along with demand,” says Boka, adding that, instead, one of the major challenges facing the forum has been the cost associated with holding the events. In order to help curb these costs, in October 2015 the BGF began requiring that all stakeholders pay a small attendance fee. “The fee has helped us to have more forums and to reach more farmers,” says Nyakudya.

Moving forward, Nyakudya says the forum will continue on its quest to prepare farmers well ahead of the coming tobacco season. “Farmers should be told of what is expected of them as they come to the floor with their leaf, and we are trying to give them as much information together with the other stakeholders,” she says. “This is the only way they can fetch high prices.”

box

The BTF empowers tobacco farmers through:

• Field days and facilitation of mentorship with master farmers
• Health and safety advisers
• Dialogue and networking with contractors, financiers, agricultural inputs suppliers and agricultural implements and mechanization providers
• Climate and weather advisers
• Agronomy, advisory and Extension service providers
• Regulatory stakeholders
• Boka Floors compliance officers
• Research and development institutions
• Energy providers and consultants
• Environment protection agencies and organizations
• Agricultural learning institutions
• Reforestation and pollution management institutions

In tough times, leaf merchants are trying unconventional business models, with varying levels of success.

By George Gay

At the end of 2013, I contributed a story to Tobacco Reporter about “independent leaf dealers” that was a follow-up to a piece that had been written by somebody else at the beginning of the year. I don’t remember much about those stories, but on the other hand, I don’t need to look back at them to recall that neither the other writer nor I even got close to the point where we could be confident of how the term “independent leaf dealer” might be defined.

Asked again to write on the same subject, I’m now in a better position than I was because I chanced upon MXTobacco during Tobacco Reporter’s TABEXPO exhibition, which was held in London in October last year. MXTobacco is an independent leaf dealer if there ever was one because it supplies directly to the end user only tobacco grown on the farm of the company’s owner, Massimo Mantovanelli.

Mantovanelli produces flue-cured Virginia on a farm near Verona, Italy, where his family has been growing tobacco for three generations. In fact, to say that he produces flue-cured is to tell only a part of the story. He produces flue-cured, cures it, packs it, promotes it and sells it—he is an independent leaf grower and an independent leaf dealer.

Like other Italian tobacco growers, he used to produce his tobacco under contract to multinational tobacco companies, but that all changed three years ago when he decided on a new business model. Speaking during the London exhibition on a stand festooned with his own tobacco, Mantovanelli told me that he had changed the way he operated because he had wanted to expand his horizons and widen his customer base—to create a bigger network of customers.

And he had been confident that he would be successful on his own. “We have a particular soil and climate in our area,” he said. “It is well-located for tobacco cultivation. We know our product, we believe in our product, so we thought we would put a face to it.”

In part, he put a face to his tobacco by attending tobacco industry shows, and it worked. “We are happy,” he told me. “We have had good results. At the beginning it was a bit hard, but now it is getting better each year.”

I asked Mantovanelli quite what he meant by having good results: Did he mean that he could sell his tobacco at a good price? And his reply was interesting, partly because the direction he took the answer indicated, I think, why he has been successful. “Yes, for a price that we consider good for the product we are supplying,” he said. “Tobacco is like wine. It’s not a standard product. It’s a natural product so it is difficult to say what is the right price for that product.”

He then picked a pen from a container on the table where we were sitting and said that a pen in London was the same as a pen in the U.S., Russia or wherever, but tobacco was natural and the final product was different depending on where you grew it. “You have to have the right soil, the right climate, and you have to follow the entire process in the best way: fertilization, watering, curing, storage. There are different processes, and if every one is done in the right way, the final product is the best.”

He must be doing things in the right way because the prices he is getting for his tobacco are better than those he used to get when he operated under contract. And this is perhaps not surprising because Mantovanelli is a specialist. He grows 150–200 tons of flue-cured Virginia tobacco on his farm each year, but only flue-cured—no other types of tobacco and no other crops.

He is also an enthusiast. I hadn’t met him before October, but I imagine that he was always passionate about growing tobacco. And now he is passionate, too, about selling it—about traveling to meet and learn from his customers and to have them visit his farm. As his brochure says, “We invite you to our farm to smell the aroma, feel the softness and taste our product.”

His customers are small manufacturers, many of whom produce shisha. He has sold his tobacco, in leaf or strip form, to Jordan, Turkey, Israel, Romania and even to the U.S. Sometimes he arranges transport and sometimes the customer does, but all of his tobacco is packed in C48 cases: 200 kilograms in the case of strips and 120–130 kilograms in the case of leaf. And each consignment is accompanied by pictures of the packed tobacco as it made its way through the various processes, from curing to packing.

Different business models

What Mantovanelli is offering is, if not a unique service, then certainly a very unusual one, and one that clearly appeals to a certain type of manufacturer. There is a direct relationship between the producer and the manufacturer, which can be certain about the origin of what it is buying. Certainly the model seems to work. Mantovanelli is able to employ 15–16 people for six months of the year and to make a good living.

But it would be wrong to become too starry-eyed about such a way of doing things. Mantovanelli is not an ordinary farmer, and most farmers would not have the conditions, the operations or the entrepreneurial skills to do what he has done. And it is just as well that they don’t. It would cause an environmental disaster if each and every tobacco farmer started flying around the world to visit each and every customer. What Mantovanelli’s story seems to say is that the leaf tobacco business is best served by a range of business models.

For instance, while the Mantovanelli model does away with the specialist dealer, there is another model that does away with the manufacturer. John Wallace, the principal of Leaf Only, told me that a part of his business involved selling up to 10 pounds of leaf tobacco to individual end users for a wide variety of purposes: “from native ceremonial traditions to at-home cigar rolling.” Although such sales represented only a very small fraction of the tobacco market, he said, they were becoming more common as end users looked to craft their own products.

Otherwise, to make a business out of selling tobacco to manufacturers, leaf dealers, it would seem, need to be flexible. Either they need to be flexible in the sense that they can align with whatever direction the major manufacturers are traveling in, which probably means being major players in their own field and possibly means forfeiting a part of their independence, or flexible in the sense that they can provide niche products.

A good example of the latter was provided by Frederick de Cramer, of Sunel in Turkey, whose organic oriental tobacco is much in demand. As de Cramer said, oriental is something of a niche product, and organic oriental is a niche within a niche. Turkey is expected this year to grow more than 3,000 tons of oriental, of which Sunel’s farmers are contracted to contribute 2,000 tons. And the outlook is for further growth, which is good for the growers and Sunel because while organic certification requires a lot of additional effort from seedbed to packing, the returns are better than they are with non-organic tobacco.

Wallace, who sources nearly all of his tobacco in the U.S., is also experiencing a growing demand for organic tobacco.

Tough times

Of course, there is a danger here if someone or some organization starts to question what the smoker reads into the term organic, as happened many years ago in the EU and as has been repeated in the U.S. more recently. But this possibly doesn’t matter hugely because niche products tend to be ephemeral. After a while they either fall by the wayside or are absorbed into the mainstream. The point is that they provide a good return while they remain in demand and niche.

This is important because, generally speaking, oriental tobacco has not been enjoying a boom in recent years. In fact, part of what de Cramer had to say was almost alarming. As with big-leaf types of tobacco, there had been a drop in demand for oriental during the past two years, he said, and it was possible that, because of the level of downturn, it would become necessary for further consolidation among oriental dealers in Turkey. Tobacco consumption trends in American-blend markets indicated there was little likelihood that demand for oriental would pick up, and the aim at the moment was simply to try to stabilize the situation. But even this might not be easy because of what has been happening to the grower base. De Cramer said that the drop in demand had meant that dealers had not been able to pay growers what they should have been paid, given that costs kept going up. “We lost last year 10 percent of our farmers; this year again over 10 percent,” he said. “If we are going to lose 10 percent of our farmers every year, this is a catastrophe. We have to try to stop that trend.”

And it is not only prices that are a problem for the tobacco industry. There are a number of other crops that Turkish farmers can grow from which they can earn a better return than they can from tobacco, and there is the continuing migration from the villages to the cities, especially of young people.

The consequence of all this is that this year Turkey’s oriental crop is likely to be short and, while prices should be higher, dealers, who in recent years have invested heavily in new processing facilities and methods, and who have been experimenting with farm mechanization systems, will not be seeing the sorts of returns that they might have reasonably expected to receive. Attempts at farm mechanization have been frustrating, and while a new curing method is showing promise, it will succeed only if manufacturers are ready to accept tobacco that looks different to that of the past. And even then it will take four to five years for it to become widely taken up by farmers.

Rainer Busch, of NewCo, also said that the recent past had not been easy. The past three years, during which there had been a global oversupply of tobacco, had made life difficult for independent leaf merchants, he said, because cigarette manufacturers had tended to give priority to the bigger, traditional multinationals.

Rick Smith, of Independent Leaf Tobacco Co., was also in agreement that recent times had been tough. Small dealers, he said, were holding on by a thread, because they were being hammered by the same issues as were affecting the bigger operators but were less able to withstand those pressures. Because of the big leaf inventories available, clients had squeezed margins to breaking point. Too much tobacco was being offered by too many players. There had been overproduction, and consumption was slipping in those countries where it had been possible to make money in the past.

But Wallace was more optimistic and described the past couple of years as a period of growth, though he pointed out that this might be because his company did not fit the traditional definition of a tobacco merchant. Additionally, he thought the growth that he had seen could perhaps be put down to the fact that his company was relatively young, and the fact that his offering fit well with the growing interest in “natural” tobacco products.

And Pieter Sikkel, of Alliance One, had at least one positive take on the last couple of years. “It wasn’t that long ago that manufacturers were vertically integrating their supply chains and directly contracting with growers to procure some of their leaf supply,” he said. “Over the course of the past two years, we have started to see some of those vertical integration strategies reverse as the efficiency and cost savings of leveraging compliant leaf merchants’ capabilities are presenting opportunities for manufacturers to reduce cost, improve quality and source a compliant sustainable product.”

Shifting preferences

Asked about whether he had noticed any shifts in where leaf tobacco was being sourced, Smith said that he thought price had become the only driver in this respect, while Busch said only that he thought cigarette manufacturers were worried about future suppliers and the sustainability of their suppliers. Sikkel, meanwhile, said that it was important when considering shifts in where leaf tobacco was sourced to keep in mind the impact of the economy and social responsibility. “The consumer of today demands socially responsible and sustainably sourced products, and the tobacco consumer is no different,” he said. “Current and future tobacco leaf sourcing areas must be sustainable, or they will not be part of the future supply chain of tobacco. However, the economy also plays a role. In 2014, many people said Brazil would steadily decline as a future supply source due to the high relative dollar cost of tobacco. Now, Brazil is seeing renewed demand—the effect of the devaluation of the exchange rate no doubt has played a significant part. On the other hand, the strong dollar is affecting leaf export demand for the United States, which had been growing its exports in recent years. While short-term factors, such as the U.S. dollar strength or weakness, may change annual demand, we can expect to see long-term shifts in sourcing that are based on the need for sustainable, compliant, less complex leaf supply chains.”

Meanwhile, asked about whether he had noticed any changes in attitudes in source countries—more or less confidence in the future, or more or less enthusiasm for growing tobacco perhaps—Sikkel said tobacco was a key crop in many countries. It provided an important source of income to farmers, states and countries in some of the poorest regions of the world. “It is a vehicle for sustainable development of local communities, and it provides government revenues that are used to build roads and schools and other vital infrastructure,” he said. “It is not easily replaceable as a cash crop—if it were, growers would already have done it.” Wallace, however, said he had definitely noticed a decline in enthusiasm for growing tobacco. For some it was about crop failure and insurance. For others, it was about supply, demand and price. And for others it was about regulatory agencies making the hard work of raising tobacco that much harder. In answer to the same question, Busch said that it was his opinion that traditional supplier countries producing aromatic tobaccos were most enthusiastic about continuing to grow the crop. But Smith said he thought that just about everywhere the mentality had become one of “hold on,” better times are sure to come. “I guess we are all optimists or we couldn’t be in this business,” he added.

Finally, asked whether he had noticed any shifts in demand for the various types and varieties of leaf tobacco, or in the way leaf tobacco was delivered to the end user, Busch said that lower-quality tobaccos, especially filler types or low-stalk leaf and tobaccos with off taste, were of little interest and difficult to sell at any price. And there had been an increase of partial shipments and just-in-time deliveries. But Smith said there had been a slight uptick in demand for air-cured tobacco for the low-end cigar and roll-your-own markets.

Attempts to restrict the consumption of shisha and other niche tobacco products may very well push smokers to cigarettes.

By George Gay

Content warning: I’m going to be a little disrespectful to all but one of the legislators in Toronto, Canada, who voted on Bill 45.

According to a story by Chris Doucette in the Toronto Sun in December, Schedule 3 of Bill 45, a bill that in May passed its third reading by 99-1, puts the same restrictions on the use and sale of e-cigarettes as those imposed on traditional tobacco cigarettes. In part, this means that retailers will no longer be able to show customers how best to choose e-juice, how to fill an e-cigarette with e-juice, how to operate e-cigarettes and how to clean these devices.

Unless I’m missing something here, this is a staggeringly daft piece of legislation. For one thing, it seems to imply that the legislators, through lack of observation or failure to investigate properly what they are legislating about, believe that e-cigarettes are little different from traditional tobacco cigarettes—perhaps that they carry the same level of risk. But then such muddled thinking, or lack of thinking, has occurred elsewhere, infamously within the hallowed halls of the U.S. Food and Drug Administration (FDA)—and others have flagged up this sort of nonsense before.

What seems to be even dafter is the idea that you would prevent people from learning properly how to use these devices. This is an assault on knowledge. This is the sort of restriction you expect from totalitarian regimes and extremist organizations, not from a provincial Canadian government. Surely, given that some people are going to use e-cigarettes, it would be sensible to allow those people to learn how to use them properly.

Doucette started his piece with the war cry of a group of demonstrators, “Vaping is not smoking!” That the demonstrators had to point this out was bad enough. That the legislators missed the point is a calamity.

But perhaps we have to accept that e-cigarettes and vaping constitute a technology and a social advance that is just too difficult for a lot of politicians and bureaucrats to grasp. The EU Commission, the FDA and the World Health Organization (WHO), aided and abetted by the Luddite wing of the tobacco control community, have all been doing their bit to try to smash this particular machinery of change. They’ll probably all be a lot happier when vapor products—viable, lower-risk alternatives to tobacco cigarettes—are dumped in the trash can of history, and tobacco products, especially cigarettes, are once again in the ascendancy. You know where you stand with smokers and other tobacco users. You can demonize them, denormalize them and steal their money through unconscionable levels of taxation, and they just take it. Pesky vapers take to the streets with their noisome placards.

On shaky ground

As I write this, waiting to hear what the FDA deeming regulations have to say on e-cigarettes, it certainly seems as though vapor products are standing on shaky ground, at least in a number of countries, and this raises the question about what will happen should the Luddites win the day. Will there be a resurgence in tobacco products and, if so, in what types of products?

Well, if you’re a resident of Toronto, the demise of e-cigarettes is unlikely to provide a boost for shisha smoking. According to a story in the Toronto Star, the Toronto City Council voted in November to ban shisha use inside licensed establishments such as bars, restaurants, cafes and lounges, effective April 2016, a move that was expected to affect about 70 businesses. Now if you are going to ban tobacco smoking in enclosed public spaces, it is logical that shisha smoking should be included. But there was one aspect of the council’s deliberations that seemed to make no sense. Lawyer Noel Gerry, who represents 14 of the businesses that were expected to be affected, was said to have described as “outrageous” the argument that the impact would be similar to that of banning tobacco use in restaurants. It is difficult not to agree with him. Banning cigarette smoking in a restaurant might be seen by some as an annoying inconvenience. Banning the use of shisha in a shisha lounge is on a different level. The clue is in the name of the establishment.

The fact that shisha smoking might be under attack in Toronto wouldn’t on its own cause an investor to check her share portfolio for the pungent smell of highly flavored tobacco, but the cumulative effect of what is happening in other parts of the world might. Shisha seems to be under attack in any number of places, in any number of ways, for any number of reasons. In November 2014, Singapore banned shisha on the grounds that, in Singapore at least, it was regarded as an “emerging product” that appealed to young people. Clearly concerned about—but seemingly with scant knowledge of—e-cigarettes, Singapore was intent on banning such emerging products to prevent their proliferation and entrenchment. It was the fairly usual reaction to a change that had not been engendered by official action and that was therefore not understood: Stop it in its tracks.

Meanwhile, in December, Mahak Mannan, writing for 7Days, said that a leading oncologist had called for stricter measures to combat smoking, especially shisha and medwakh smoking, in the United Arab Emirates (UAE). The doctor was quoted as saying that while smoking generally was the biggest cause of lung cancer in the UAE, it was shisha that was the big issue.

The question arose, however, as to whether it really was such a big issue. Earlier in the year, the results of a survey had apparently shown that tobacco smoking was “falling out of favor” in the UAE. A story by Anam Rizvi and Jennifer Bell in The National did not mention who carried out the survey and gave few details of the results, but it said that 76 percent of respondents had said they did not smoke cigarettes or shisha. And of those who did admit to smoking, few admitted to smoking every day: 16 percent in the case of cigarette smokers and only 3 percent in the case of shisha smokers. Admittedly, medical doctors were said to have been skeptical about the results. One said that his estimate was that 70-75 percent of his patients were smokers, which, if it is correct, would turn the result of the survey on its head. Perhaps the survey question was badly phrased.

Meanwhile, calls were made last year in Muscat, the capital of Oman, for the banning of shisha cafes, though whether such a ban could be brought in soon was a moot point. A story in the Times of Oman had it that the municipal authorities there were having trouble enforcing restrictions that were supposed to limit the hours during which such cafes could open. A worker in one cafe was quoted by the Times as saying that his establishment opened 24 hours a day on all but two days of the year.

Also last year, in Bermuda shisha was to be swept away as part of legislation banning any tobacco or related product that included flavors, and in Nigeria the sale and use of shisha was to be banned as part of anti-tobacco legislation that otherwise addressed more usual issues such as public-places smoking, health warnings and advertising.

Learning lessons

It is true that, in some other places, the opponents of shisha have their work cut out, however. In many places where shisha is commonly consumed it has a social acceptability that no longer exists in the case of cigarette smoking in the West, an acceptability that in some places means that a trip to a shisha lounge might be regarded as a family outing. They have to overcome also the belief held by some people that bubbling tobacco smoke through water somehow gets rid of the nasty substances, which, of course, it doesn’t.

And they probably have to try to learn some lessons from the West about not over-egging the propaganda put out about the dangers of smoking. In the West, overzealous tobacco control people decided, no doubt after working with focus groups, that cigarette smokers could be turned from their habit simply by getting governments to require that tobacco manufacturers sell their products in packs bearing pictures of the most grisly diseases they could imagine and depict, with the obvious result that some of those pictures bore no relation to anything any smoker had ever seen and were, therefore, dismissed. To make matters even more confusing, in the U.K. it is now fashionable to blame some of those diseases directly or indirectly on sugar, and the time will come when guidance will have to be given on whether, for instance, smoking or sugar is the major cause or causal factor in tooth decay.

In a similar fashion, I notice that shisha opponents are tending to go too far in emphasizing the problems caused by this type of tobacco consumption. By “too far,” I mean making statements that do not seem to the man in the street to add up, or make sense. It is often stated, for instance, that an hour or a “session” of shisha smoking is the equivalent of smoking 100 cigarettes. I have no information about whether or not this might be true, partly because it is never really explained what “equivalent” means. But if I were a young hour-a-day shisha smoker, I would look at this figure and wonder whether it could be true that “equivalent” meant doing the equivalent damage, because if it did, it would mean that I was rushing towards Armageddon at seven times the speed of the average cigarette smoker. Indeed, I would look about me and wonder why there existed any middle-aged and old shisha smokers.

Shisha smoking is said above to be relatively socially acceptable, and it is clear why that is so: It is often a social undertaking. It is not something that is done on the run, while riding your bike or outside the pub in three minutes flat while standing uncomfortably in your shirtsleeves at minus 5 degrees Celsius. So it has a lot to recommend it, and it seems to me that there is a need for some sensible studies to be carried out into how shisha is generally used, how harmful it is, and how harmful it is relative to cigarettes. Bans, restrictions and stating that an hour of smoking shisha is the equivalent of smoking 100 cigarettes are probably well-meant in that they are aimed at stopping people from smoking, but if such actions merely encourage people to switch from smoking shisha to smoking cigarettes, you need to be sure that this is a positive health move.

At the start of this piece I mentioned (and many people better qualified than I am have also mentioned) that policies aimed at banning or discouraging the use of e-cigarettes and, therefore, almost encouraging the continued use of cigarettes are devastatingly counterproductive. Surely, we don’t want to make a similar mistake with shisha and other products.

It seems that any product, such as snus, that might be hugely less damaging than are cigarettes, or any product, such as cigars, that might be moderately less damaging, are coming in for attention from tobacco control people that is out of all proportion to the problems that they cause. The EU, the FDA and the WHO all seem not to like niche products, especially new niche products.

It would seem that the strategy in a number of countries is to pick off the outlying products first, the nontobacco vapor products and OTPs, and then concentrate on what is left: cigarettes. Unless these policies have been properly thought through and are supported by fairly robust evidence, they seem to me to add up to a dangerous, damaging and, in the mid-term at least, counterproductive strategy.

As the tobacco industry undergoes structural change, suppliers of adhesives face new challenges.

By Stefanie Rossel

For the tobacco industry, 2013 marked a watershed moment: For the first time, global cigarette sales volume declined (by 1.4 percent) even when including China, according to data provided by market research company Euromonitor. The trend continued with another 0.4 percent decline in 2014, Euromonitor said, amounting to total cigarette consumption of 5.8 trillion sticks worldwide, according to The Tobacco Atlas.

The ongoing decrease of cigarette volumes affects not only tobacco companies but also their suppliers, among them manufacturers of tobacco adhesives and the respective application equipment. For the manufacture and packaging of every 1 billion cigarettes, an estimated 15.5 tons of adhesives are needed. Hence, weakening cigarette volumes indeed make a difference.

Little wonder then that suppliers of adhesives and adhesives application systems have mixed emotions about the future of their segment.

“The global number of sold cigarettes is shrinking worldwide. Consequently, the total demand of adhesives needed in the industry is going down as well,” says Joerg Liebe, sales manager of adhesives manufacturer Tuermerleim, which is based in Germany. “The overall perspective, quantity-wise, for this market is clearly negative.”

Marc Gonzalez, technical director of Spanish adhesives supplier Pujadas, is more upbeat: “We are facing significant growth opportunities, so our view is a very positive one. Big tobacco multinationals and independent manufacturers are supporting our growth [and are] willing to promote a healthy category with alternative suppliers and competitive adhesives solutions,” he says.

“On the other hand, we are aware that traditional markets present some challenges due to a certain decline in sales and the growth of legislation against smoking,” Gonzalez notes. “Tobacco companies are working hard and very creatively against this evolution with more innovative and attractive products. The new focus of the companies is clearly to differentiate themselves from others, and the way to achieve this is innovation. The differentiation process and the value creation process are extended to all components of the cigarette.”

Cihan Olucay, tobacco adhesives sales manager at the industrial adhesives business unit of Turkish manufacturer Organik Kimya, which is a newcomer to the tobacco industry, stresses that despite cigarette volume declines, the value of the worldwide tobacco market continues to grow. “The market is increasingly controlled by multinational companies,” he says. “However, we believe that small corporations will continue to add the greatest value to customers through their fast decision-making conditions, customer orientation and innovative approach in providing solutions to their customers.”

Henry Tuck, managing director of adhesives application systems manufacturer SPI Developments, in the U.K., draws a different picture. With the advent of vapor devices and modified versions of traditional cigarettes such as heat-not-burn products, the tobacco industry has a much wider range of products on offer than merely conventional cigarettes, according to Tuck. “The decline in the manufacturing of conventional cigarettes suggests the adhesive market would reflect the decline,” he says. “However, when you consider that adhesive and application systems are used in all aspects of conventional and ‘new product’ cigarette manufacturing, it is hard to conceive how the market can be negative. We believe it is not a question of positive or negative, but more of an evolution as trends and changes affect the tobacco industry as a whole.”

Opportunities for growth

Among adhesives suppliers, views vary as to whether next-generation tobacco products will have a positive or negative impact on their businesses. Gonzalez sees them as an opportunity to introduce new adhesives that are currently being used for other applications, or to directly develop new formulations. “In fact, some of our packaging glues have been used in the packaging of heat-not-burn products,” he says.

“We believe that the adhesives business will not be affected by e-cigarettes in the short term,” says Olucay. “But it is a fact that in the long term there will be fewer smokers. Tobacco is an important agricultural product for many countries. So there will be demand for innovation in the tobacco industry for less hazardous products, and therefore development in related product categories will enable growth and other opportunities.”

Liebe points out that e-cigarettes need totally different adhesives—if any. “Every substitution of classical cigarettes by e-cigs, by nicotine patches and by nonsmoking reduces the demand for the adhesives used in production.”

Following the downward trend in cigarette volume sales, Tuck says, cigarette producing companies are not investing in new machinery in the way they used to, but instead are investing heavily in other product areas. “From the point of view of an adhesive application system manufacturer, this increases the opportunities to upgrade old machinery to improve its performance at relatively low cost, whilst new-generation products which are not e-cigarettes are a good source of innovative adhesive-system project work.”

Wanted: performance

Getting back to the manufacture of conventional cigarettes, the list of requirements adhesives will have to meet is obviously getting longer. In the light of shrinking sales volumes, the quest for enhanced production efficiency to ensure profitability has gathered momentum. Adhesive formulations for the tobacco market need to be high-performance products in order to meet all the challenges during the production process of cigarettes, explains Gonzalez: “Producers target to achieve higher productivities with high-speed machines, so runnability and cleanness of the glue are key factors.”

The faultless assembly of filters and tipping paper presents a particular challenge for adhesives, and suppliers have been developing new products to meet that challenge. “Regarding tipping, we can offer to our customers adhesives specially designed for high-speed machines with production output of up to 20,000 cigarettes per minute (cpm) that presents good results not only in fully surface application but also in glue pattern,” says Gonzalez. “Also, new grades have been introduced in the market for difficult-to-bond tipping papers, especially [those] used in slims and superslims configurations. Finally we include in our portfolio new special glue grades for filter seaming, [which are] recommended to use when the wrap-up paper presents very high porosity.”

However, not every maker in the tobacco industry is a high-speed machine, says Liebe: “As there are still many cigarette producers who are running machines with ‘normal’ speed, say, 8,000 to 9,000 cpm or even slower, suppliers also need to offer adhesives that work well on these machines. Therefore it is not enough to have only the top high-speed adhesive in your portfolio; you have to cover all types of machines, also slower ones. To have a broad product range is as important as to be at the front of R&D.”

As far as running performance is concerned, much depends on the application equipment, Tuck explains: “Whilst having good-grade adhesive, high-quality substrates and a routine maintenance schedule all help with the application equipment’s functionality and performance, the ability to precisely control the amount of adhesive applied using electronic pump systems is also highly beneficial to runnability and improved production performance,” he says.

“Historically we have found that the smallest change in material can affect the application and, ultimately, the quality of the finished product. So the adjustability and repeatability provided by the electronic controls makes a big difference in handling the wide range of adhesives and other materials.”

Apart from continuing to upgrade its equipment and improving the detail performance of its modules, SPI Developments has launched a new mobile adhesive system that can be configured to suit different arrangements of polyvinyl alcohol, and hot-melt pump modules to suit the latest product specifications. “This provides more flexibility when retrofitting older machines, particularly when creating new product specifications,” says Tuck.

A complex task

Meeting the requirements for cigarette packaging adhesives is perhaps even more of a challenge, as cigarette manufacturers, under the pressure of a declining cigarette market and increasing regulations, are increasingly seeking to differentiate their products from the competition through ever more sophisticated packaging, using new substrates such as polyester, and novel printing/finishing technologies and materials. “We see metallized surfaces or hydrophobic coatings,” says Liebe. “Each surface may require a special adhesive. Sometimes the standard products work well, but at other times some R&D is needed to give the customers a choice concerning speed, performance,” he points out.

“The varnishes or coatings used on packaging cartons in order to increase visual attractiveness can be incompatible with the common adhesive used in production,” agrees Olucay. “Therefore it is important to establish a partnership with adhesive suppliers before promoting a new product to the market.” He adds that Organik Kimya has developed a packaging grade for hard-to-bond surfaces like metallized cardboards, which is an important issue in the industry: “This grade is also particular in that it can be applied both by disc and by nozzles.”

Regulatory impact

Increasing regulation, such as the revised European Tobacco Products Directive (TPD2), which will enter into force this May, makes matters even more complex for adhesive manufacturers. “So far, all the adhesives used for the manufacturing of cigarettes, at least in Europe, need to be in compliance with the German Tobacco Regulation [TVO],” Liebe explains. “That is an indispensable requirement of all our customers in Europe. With the TPD2 there seem to be changes ahead. The TVO was a ‘positive list,’ defining clearly a list of allowed ingredients for all nontobacco materials [NTM] like paper, glue, filter tow, etc. Now there is a ‘negative list’ of specific products under discussion, which are not allowed to be in the NTMs. We have seen only drafts so far. We need to wait and see what the regulation will finally be.”

Outside Europe, he adds, most customers request a full compliance with FDA 21 CFR Ch. I §175.105, the U.S. code of federal regulations that covers the use of adhesives in food packaging

While new regulations have little impact on the application system hardware, Tuck believes that regulations will impact the equipment software. “We anticipate new regulation will require the logging of manufacturing data, to give full traceability for the manufacturing process, and this includes adhesive application. We predict that there will be an increase in requirements for equipment to monitor, record and log manufacturing information.”

Focusing on innovation

Despite the many challenges induced by an industry undergoing structural changes, the tobacco sector also holds many business opportunities, as the interviewed suppliers of adhesives agreed. “There is always room for new products, and new ways of manufacturing these products,” says Olucay. “We produce our own homopolymer, which enables us to formulate a wider range of products. This is an advantage to us while customizing and adapting our products in these challenging times.”

Gonzalez believes that, in the near future, the production of eco-friendly or sustainable products will be a key factor for adhesives manufacturers to set themselves apart from their competitors and to create added value for its customers.

“Because of this we work on the introduction of sustainable raw materials in our products. In our product portfolio we clearly identify all our solutions that are based on sustainable raw materials and we call them ‘green products.’ Also, we ask our suppliers to follow this path, giving us alternative raw materials coming from renewable and sustainable sources. Our commitment is to increase the content of such natural ingredients in our glues, and therefore we are working on partial substitution of standard synthetic ingredients with natural ones. Right now the cigarette companies look for added value that permits them to differentiate themselves from their competition. These extra values could come from the usage of eco-friendly products with less impact on the environment. So we think that the tendency for the coming years will be to maximize the usage of natural raw materials.”

For Liebe, opportunities arise with every new technology on the machine side and every new requirement on the tobacco industry side: “From our perspective it is not the hunt for higher speed anymore but more for a stable and smooth running of the machines with less interruption, reduced cleaning times and quicker readjustments to other formats, etc. Here again a close cooperation between the glue manufacturer, the machine producers and the cigarette producers is essential for the development of new adhesives.”

Tuck expects regulations to dictate the need to monitor, record and store data on manufacturing and material usage, and therefore anticipates that future application equipment will need to incorporate software that has the capability to log data. “Our equipment can now be supplied with the function of data logging, ensuring that the customer is ready for existing and any future regulations.”

The promise offered by emerging tobacco markets begins to fade.

By Shane MacGuill

The notion that, as years go by, international tobacco manufacturers will increasingly need to hedge against secular cigarette volume declines in developed markets with growth in emerging territories has long been worn into a truism. The key underlying issue, however, is the future shape, scale and stability of this growth. Do emerging markets still represent a substantial opportunity for international manufacturers, and for how long?

As with all complex questions, there is a short approximate answer and a longer, more nuanced one. Emerging and developing markets clearly still represent a potential source of significant short- and medium-term revenue for international tobacco manufacturers, but the narrative is increasingly divergent between different individual markets, and it is one that is ever more complicated by issues of affordability and regulatory expansion.

In sheer data terms, there is no question about the magnifying importance of the emerging environment to the global tobacco market. Using a broad interpretation of the term, the 48 emerging and developing markets (not including China) in which Euromonitor does direct research contributed some 59 percent of global volumes (excluding China) in 2014 but accounted for only 38 percent of the absolute volume decline between 2009 and 2014. Perhaps surprisingly, the trend is even more pronounced in value terms. This broad cluster of emerging markets accounted for only 34 percent of global cigarette U.S. dollar value in 2014 but contributed some 74 percent of the absolute increase in value between 2009 and 2014.

And the trend is set to continue. By 2020 the same markets will account for over 60 percent of global volumes (excluding China) and will have provided three-quarters of the constant terms, fixed dollar exchange value growth in the intervening period. All of which supports a base hypothesis that robust smoking cultures (defined as ones in which prevalence is high, the habit is tolerated—even aspired to—and there is a relative absence of organized civic agitation for heightened regulation) in developing markets, relatively rapid economic growth and the headroom provided by lower tax burdens affords the industry space for lucrative expansion.

Reality check

In practice, however, there are reasons for doubt. Firstly, affordability remains, and indeed will only amplify, as a key issue for cigarette growth in developed markets. Based on a number of hours worked on the median wage required to purchase at the average pack price, of the 20 least affordable global cigarette markets (again from Euromonitor directly researched markets) only three, or 15 percent, are developed markets, while only five of the 20 most affordable markets are emerging and developing countries. In just under 70 percent of emerging and developing markets was a pack of cigarettes less affordable in 2014 than it had been in 2009. As recently as November 2015, Alison Cooper, CEO of Imperial Tobacco, attributed its difficulties in Morocco and the high levels of illicit product in that market to it being “one of the least affordable in the world.”

So while, in absolute terms, the value of cigarette consumption in these markets, in all price bands, will continue to increase very rapidly—by an estimated 85 percent up to 2020 (which is undoubtedly a boon to the industry in the short to medium term)—the share of premium and mid-price brands will not significantly increase, if at all. This connotes a lack of progress in major markets (for example Brazil, India and Turkey) in terms of improving the relative balance of consumption quality, meaning that ultimately emerging markets provide an imperfect hedge against the longer-term pattern of lower value consumption in mature markets, and are themselves primed for functional consumption behavior when the requisite legislative and taxation conditions are extended, as is inevitable.

On regulatory creep, Latin America perhaps stands as a foreshadowing of what might transpire in other geographic regions. Some years ago, the received wisdom was that economic dynamism and moderate regulatory outlooks would eventually make Latin America a stable stream of revenue, much in the same way as many Asian, Middle Eastern and African markets are currently viewed. However, the decided truth must now be that Latin American governments are determined not to facilitate this scenario, and many markets in the region now have highly restrictive operating environments—in fact, several are in the vanguard of global tobacco control. With measures restricting companies’ ability to communicate with their consumers and to premiumize their products, the future for the industry in the region is one of unstable and ever-diminishing returns.

As mentioned, in some circles, these assumptions have simply shifted onto African and Asian markets. However, significant resources are being invested in ensuring the emergence of similar tobacco control-driven decline cycles in these regions, which would mitigate against the materialization of oft-predicted high value growth and push more and more consumers in these regions into the grip of a developed market-style, commoditized relationship with tobacco consumption.

Using debates around plain packaging as a proxy, the appearance of markets like Hungary, Turkey, Venezuela, South Africa, India and Burkina Faso among those said to be seriously considering its introduction indicates that the cycle of regulatory adoption from core tobacco control markets such as Australia and Ireland to emerging jurisdictions may be set to significantly truncate from decades to years. Further, organizations like the World Health Organization’s Tobacco Free Initiative are heard ever more clearly and receptively by emerging market governments on issues such as taxation. Finally, one sees strengthened tobacco control in Africa, in particular, emerging as something of a cause celebre within the anti-tobacco community. With its lower age demographic skew, relatively low current incidence of manufactured cigarette consumption but strong background awareness of tobacco, and laxer tobacco control regimes, Africa is attracting resources and attention at a high level.

Contradictions

An examination of some individual emerging markets elucidates some of the contradictory trends on display. The last couple of years have been challenging for the tobacco industry in Russia—traditionally the world’s frontier market—and echo the pattern in Latin America referred to above. A combination of constrained disposable income, higher excise taxes and the implementation of a comprehensive tobacco control strategy have significantly impacted the market. Allied to economic difficulty and geopolitical uncertainty, the Russian market has moved in a very short time from the repository of much manufacturer optimism regarding its potential to a source of real concern.

In recent years, other major developing markets such as Turkey and the Philippines have seen market turbulence caused by tax hikes and increased regulation, while manufacturers also struggle with the impact of strong core currencies on their profits from second- and third-tier markets. Further, emerging markets tend to be more exposed to geopolitical disruptions, with Imperial Tobacco’s current difficulties in Iraq being an acute case in point.

On the other hand, Indonesia holds steady as one of the last remaining true growth markets and for this reason is increasingly attracting the focus of both international tobacco manufacturers and the global tobacco control industry. Favorable demographics, relatively lax regulation and taxation, and strong economic performance make it a market of huge current and future potential, and it represents, for the industry, a best-case scenario for the short- to medium-term development of emerging tobacco regions.

In 2014, Indonesia saw the single highest volume growth of any global market (8 percent), a striking development in the context of declines in virtually all other major markets. Indeed, if you include hand-rolled kreteks (which Euromonitor excludes from its data), Indonesia in 2014 overtook Russia as the world’s second-largest cigarette market by volume. Tax reform and an ongoing shift to white-stick products is leading to gradual band polarization, as low-income consumers downtrade to economy and higher-income consumers are pushed into the premium segment.

There are other markets of real potential for the industry. To no little attention, British American Tobacco (BAT) returned to Myanmar in 2013, a country that in most ways is prototypical of a modern-day emerging opportunity, with low levels of use of manufactured cigarettes but relatively high use and awareness of other tobacco products allied to low existing regulation and economic promise. BAT also continues to report volume and profit growth in markets like Bangladesh and Pakistan.

And in the last few months, the imminent lifting of international embargoes against Iran has fully opened up another potential gold mine for the industry. International manufacturers are thought to be positioning themselves (in the case of Japan Tobacco’s purchase of Arian, explicitly so) for a concerted push into a market with several propitious characteristics—a young demographic profile, relative tolerance of tobacco at most levels of society and high pre-existing affordability.

There is then every prospect that international manufacturers will see success in markets such as Iran, Myanmar and Indonesia (which stubbornly continues to refrain from ratifying the FCTC), but it is an open question whether, in the context of greater global regulatory consensus and divergent individual economic performance, in time these will not come to be seen less as the brightest lights in a constellation of broader emerging stability and more as pockets of retrenchment in an increasingly hostile universe.

Shane MacGuill is senior tobacco analyst at Euromonitor International, a market intelligence firm.